Dollar at nearly 3-month highs

Bernanke to testify on Capitol Hill; inflation data in line with forecasts

By

WanfengZhou

NEW YORK (MarketWatch) -- The dollar rose to almost three-month highs versus the euro and yen Tuesday as investors awaited Ben Bernanke's testimony before U.S. lawmakers.

The Federal Reserve chairman is scheduled to deliver the central bank's semiannual report on monetary policy to the Senate Banking Committee on Wednesday. Given the heightened uncertainty about the near-term outlook for U.S. interest rates, his words will be closely watched for signs of the Fed's leanings. See full story.

"Even though Bernanke may prove mindful of policy lags and risks on the horizon, he will likely convey that upside risks to inflation bear scrutiny," said Sophia Drossos, currency analyst at Morgan Stanley. "We view Bernanke more likely to adopt a neutral to hawkish bias."

"While the U.S. dollar has rallied sharply over the past few days, we believe it could squeeze higher if the testimony prompts investors to price in a greater risk of near term rate hikes," Drossos said.

Late in New York, the euro stood at $1.2505, compared with $1.2521 late Monday. It earlier fell to $1.2470, the lowest level since April 27. The dollar changed hands at 117.29 yen, compared with 117.14 yen, after rising to 117.58 yen, the highest level since April 21.

The British pound traded at $1.8264, compared with $1.8188. The dollar was at 1.2522 Swiss francs, compared with 1.2475 francs. The euro was fetching 146.66 yen compared with 146.67 yen. See live currency prices.

The dollar index, which tracks the U.S. currency against a handful of the world's major currencies, rose as high as 87.18, its highest level since April 27.

At the same time, currency markets continued to eye developments between Israel and Lebanon as violence continued, said Michael Woolfolk, senior currency strategist at the Bank of New York. The dollar has benefited from safe-haven flows this week amid concern about Middle East tensions.

"The dollar is likely to hold value in the shorter term" so long as the geopolitical risk remains, said Stuart Scrase, a senior foreign-exchange dealer at CMC Markets. However, "with a 'war premium' being factored into the greenback right now, any additional evidence that we may see a resolution could be sufficient to trigger profit taking off recent gains, in turn initiating a marked retreat for the dollar.

Buck may be vulnerable

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, cautioned that Bernanke may not offer the market "any more guidance" than was provided by the Fed policy meeting statement in late June.

"We would expect Bernanke to be guarded about near-term policy actions, not wishing to steer market expectations towards a hike or a pause," he said.

"Then we suspect the market will not be as confident of a hike at the end of the week as it is today," he said. "Given the recent run-up in the U.S. dollar, the greenback may be vulnerable as well to a downgrade of the odds of a Fed hike back to a more neutral 50/50 chance."

After 17 consecutive interest rate hikes, the Fed has signaled that it is near the end of its tightening cycle. But most analysts expect at least one more rate hike, probably on Aug. 8, to keep the lid on any inflationary pressures. The fed funds rate currently stands at 5.25%.

The Federal Reserve will get a better picture of inflationary trends on Wednesday, when the Labor Department reports on the consumer price index for June. Economists expect a 0.2% gains in both the headline and core CPI.

Capital flows rise

Capital flows into the United States bounced back in May, to nearly $70 billion, as private overseas investors scooped up large amounts of Treasury bonds and government agency bonds. Capital flows reached $69.6 billion in May, compared to a revised $51.1 billion in April, the Treasury Department said. See full story.

Earlier, the greenback initially edged slightly higher after data showed U.S. producer prices rose 0.5% in June, but core inflation increased 0.2%. Higher energy and food prices accounted for most of the gain in June in the producer price index for finished goods, the Labor Department said. Economists surveyed by MarketWatch had expected a 0.2%

The 0.5% gain in the PPI was much larger than the 0.2% expected by economists surveyed by MarketWatch. The core rate was exactly as predicted. See full story.

Elsewhere, home-builders' confidence plunged to a 15-year low in July, reflecting growing worries about rising interest rates and declining affordability, the National Association of Home Builders said Tuesday.

The NAHB/Wells Fargo housing-market index fell 3 more points to 39 in July, the lowest since December 1991. A reading of 50 would mean sentiment is balanced equally among builders who think the market is good and those who think it's poor. See full story.

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